The dollar hit two-week highs against the euro, yen and Swiss franc on Tuesday, as investors bet that upcoming economic data could underpin expectations for higher US interest rates and support the greenback.
The US currency has drawn support from expectations the Federal Reserve will raise interest rates next week, especially after Dallas Fed President Richard Fisher said on Monday the economic risks created by Hurricane Katrina would be temporary.
Investors are awaiting to see how the dollar will react to trade data at 1230 GMT, which is expected to show a deficit of $59.80 billion in July, the second-largest level on record, but some say the shortfall might not be as big.
Producer price data due at the same time will shed light on inflationary pressures.
"The trade number is not expected to be horrendous even with the oil price influence and if PPI continues to rise at a reasonably robust clip, that's enough encouragement for the Fed to keep on hiking," said Jeremy Stretch, market strategist at Rabobank.
US producer prices are forecast to rise 0.8 percent in August from the previous month, compared with a 1.0 percent gain in July.
The dollar was up over 0.5 percent at 110.98 yen and it rose to 1.2630 Swiss francs, its strongest levels since August 31. The euro slipped to a 2-week low of $1.2257 before trimming losses to $1.2273.
Concerns about the US current account deficit shaved around 30 percent of the dollar's value in the three years to 2004 but expectations for higher US interest rates helped the greenback rally by 10 percent at one point this year.
The yen suffered from a bout of profit-taking on gains made after a landslide election victory for Prime Minister Junichiro Koizumi spurred hopes structural reforms would continue in Japan and entice more foreign buying of Japanese stocks.
The euro was up 0.5 percent against the yen at 136.27 after falling to a 2-week low on Monday.
Jitters over Sunday's German election have weighed on the euro as polls show the lead held by Angela Merkel of the reform-minded Christian Democrat party (CDU) over German Chancellor Gerhard Schroeder's Social Democrats was shrinking in the final stretch of their campaigns.